Friday, March 25, 2005

The Role of Internal Investigations

When a company has issues with government regulators, cooperation can often be crucial is determining what path the investigation will take.  Will it involve indictments, will there be civil penalties, or will nothing happen.  One aspect of this cooperation is often involves the company doing their own internal investigation.  Obviously, an internal investigation can also assist in helping the company make certain that improprieties do not occur in the future and in assessing possible liability for past conduct.  But what happens when the internal investigation turns up more than anticipated.  Often key issues here are going to be - - what to disclose, who the disclosures should be made to, and when should they be made. 

Now take AIG - an internal investigation that turns up new items that may be questionable.  (See Wall Street Journal & New York Times articles) The response to the press is "no comment."  And until the full investigation is complete, one might expect that response to the press.  But then what?

(esp)

March 25, 2005 in Investigations | Permalink | TrackBack (0)

Global Issues

Jurist reports that " French court upholds Soros' insider trading conviction."

One of the problems with operating in a global market is the difficulty of figuring out all the rules and policies that apply.  Maybe that is the problem here, or maybe its a situation that some complicated transactions need to be reevaluated by a different court.  Te bottom line right now is that Soros was found guilty.

The story from Bloomberg is that "Billionaire investor George Soros was found guilty of insider trading by a French appeals court."  It upholds a 2002 conviction for alleged activity from 1998.  The Paris Court of Appeals  "ruled that Soros's 1988 purchase of Societe Generale SA shares with the knowledge that the bank might be a takeover target broke French insider trading laws." Soros, who claims his innocence, still has the option to take his case to another court.   

(esp)

March 25, 2005 in International | Permalink

Thursday, March 24, 2005

Kozlowski's Legal Fees Covered by Insurance

As Tyco's former chief executive's trial continues, one can only imagine the increasing attorney fee bill.  At least one headache is off of Dennis Kozlowski's mind, although perhaps not permanently, in that a New York Supreme Court Appellate Court ruled 5-0 that an insurance company had to foot the attorney fee bill.   Reimbursement may be possible down the road for "the legal costs of defending noncovered claims." For more, check out the Wall Street Jrl's article here.   And for more details on the continuing trial, see here.

(esp)

March 24, 2005 in Prosecutions | Permalink

This is Getting Taxing

Professor Paul Caron of the Tax Blog has a wonderful listing of some of the recent indictments and convictions on tax cases.  See here.

(esp)

March 24, 2005 in Tax | Permalink

What Does the 5th Amendment Mean?

Our post of March 22, 2005 was titled  the"Assertion of the Fifth Amendment Leads to Firing of Two AIG Executives."  We predicted that the focus on AIG chair, Maurice "Hank" Greenberg would be heightened as a result of these current events.   It is not surprising, therefore, to see the Wall Street Journal reporting today that Greenberg may be faced with the  issue of whether to take the 5th when deposed by "regulators investigating whether his firm mislead investors by manipulating its books."

There are several interesting aspects to consider here:

1.  What would Martha Stewart advise?  Will the deterrent effect of the Stewart prosecution be to keep people from cooperating with the government in their investigations?  The government would likely assert that the deterrent effect was supposed to be - to secure truthful information.  But one wonders if that will be the net result.  This may be a good case to find out what happens when they have the choice or talking or taking the 5th in a post-Martha Stewart world.

2. Is the government pitting Greenberg against the company?  If the company fails to cooperate, there are serious ramifications to it. Yet their cooperation may prove problematic to protecting the employees. Is this really beneficial for the company?

3.  Is the company in a superior position to cooperate with the government, to the detriment of employees?  In an article I authored back in 2002 in 23 Cardozo Law Review 795, titled "White-Collar Cooperators: The Government in Employer-Employee Relationships," I stated that "[a] corporation may be in a superior position in securing the benefits associated with cooperation.  In contrast to individuals, the financial resources available to the organization may enhance its ability to be first in the race to the courthouse to serve in the role of government cooperator."

4. And what about the 5th Amendment?  It doesn't mean guilt.  It's a basic right. Or is it still?

5. And with so many parties looking over the shoulder of AIG right now ( Wall Street Jrl reports - New York Attorney  General Spitzer, SEC, DOJ and some state insurance regulators) who can even keep track of all the players in this field.

What would you advise Greenberg to do?

(esp)

                                                                              

PS: Former AIG CEO Greenberg's counsel is Robert Morvillo, who was the lead trial counsel for Martha Stewart.  It will be interesting to see whether there is a "Martha Stewart Effect" on Morvillo's advice about whether Greenberg should testify before the various agencies investigating AIG (and him), or will assert the Fifth Amendment privilege. (ph)

March 24, 2005 in Investigations | Permalink | TrackBack (0)

Plea in Ponzi Scheme

When a judge says, "NO," it may be wise the listen.  Going to another country and doing the same thing you were doing before, and the same thing a judge told you not to do, may make matters worse. It sounds simple, but sometimes is isn't.  At least not for  the individual who "pleaded guilty [yesterday] to conspiracy to commit securities fraud, two counts of securities fraud, obstruction of justice and one count of money laundering."  The case here involves a $250 million Ponzi scheme. (see LATimes for more)

A press release of the US Attorney's Office for the Central District of California reports that:

"In 2002, the United States Securities and Exchange Commission filed a civil lawsuit alleging that Wallenbrock was part of an illegal securities fraud. The SEC obtained a preliminary injunction that barred Osaki and others from running the companies. A federal judge in Los Angeles also appointed a receiver to oversee Wallenbrock. In 2003, the injunction became permanent. However, contrary to the injunction issued by the federal court, Osaki, with the help of co-conspirators, relocated operations to Canada, Belize and elsewhere. With the help of his co-conspirators, Osaki formed a new company off-shore, Village Capital Trust, that offered the same bogus accounts receivable investments as Wallenbrock, and it continued to operate as a Ponzi scheme."

So far three people have plead guilty in activities related to this Ponzi scheme and a 4th is awaiting extradition to the United States. 

(esp)

March 24, 2005 in Prosecutions | Permalink

Wednesday, March 23, 2005

More Tax

Until April 15, this blog title is likely to be common, as the IRS and DOJ join together to see what they can do to encourage the filing and payment of taxes on April 15th.   But this one is a bit different.  Instead of the focus being on the taxpayer, it  is on the tax preparer.  And the charges are not directly related to the filing of a fraudulent return. 

In a recent press release, the DOJ reports of an indictment of an individual for:

"six counts of criminal contempt for violating two injunction orders entered against him by the U.S. District Court in Grand Rapids. The injunction orders, entered October 27, 2003 and March 15, 2004, each prohibited [this individual] from giving tax advice and providing other tax services for compensation, acting as an income tax return preparer, promoting trusts, and representing clients. Evidence offered in support of the government’s request for the injunctions established that [this individual] had prepared fraudulent returns that understated income and tax for frivolous reasons."

"The indictment alleges that after the injunction orders were entered, [the accused] provided tax advice and other tax services for compensation and acted as an income tax return preparer, preparing six tax returns for five different taxpayers. The indictment also alleges that [he] falsely told customers he could legally prepare tax returns provided that he did not sign them or his customers copied the returns onto new forms."

An interesting note included in the government press release is that  the accused "is the second tax return preparer indicted this month for violating an injunction."

(esp)

March 23, 2005 in Tax | Permalink | TrackBack (0)

Detroit Terror Defendant Sentenced to Six Months for Insurance Fraud

The prosecution of Ahmed Hannan, one of the four defendants in the so-called Detroit Terror trial that resulted in the government requesting dismissal of the terrorism charges and admitting it did not have sufficient evidence to pursue the case, ended with his being sentenced to six months for an attempted insurance fraud.  After the government asked the District Court to reverse the convictions last September, it then reindicted Hannan for his role in an attempted fraud involving a fake automobile accident, and his plea agreement called for a sentence of 0 to 6 months.  Unfortunately for Hannan, he has been held for 43 months, since his arrest in September 2001; moreover, as part of his plea agreement, he will be deported in the next week to his native Morocco.  In an unusual statement that you don't hear very often, U.S. District Court Judge Gerald Rosen, who presided over the trial on the terrorism charges, said to Hannan: "I would be remiss if I did not say that the procedures that are normally followed in criminal cases were not followed in your case, and for that, you have the apology of the United States government . . . Some of the procedures failed you and, unfortunately, failed the system in this case."

The Department of Justice has been conducting a criminal investigation of the conduct of Assistant U.S. Attorney Richard Convertino, who was the lead prosecutor in the trial, and that investigation does not appear to have been resolved at this point.  An article in the Detroit News (here) discusses the sentencing. (ph)

March 23, 2005 in Fraud, Prosecutors | Permalink | TrackBack (0)

Lord Black Is the Target of a Criminal Investigation

Lord Conrad Black, the former controlling shareholder of Hollinger International Inc., a multinational media company (including the Chicago Sun-Times), is the target of a federal criminal investigation by the U.S. Attorney for the Northern District of Illinois (Chicago).  The SEC filed a civil fraud suit against Black and Hollinger last November (SEC complaint here) alleging fraud in a series of related party transactions involving non-competition payments to Black and other senior executives.  As part of that litigation, the defendants sought discovery of documents from the SEC, and the U.S. Attorney has filed a motion to postpone discovery of certain documents while it conducts its criminal grand jury investigation.  The U.S. Attorney's motion states, "The criminal investigation seeks to determine whether the SEC defendants and others fraudulently diverted corporate assets and opportunities owned by Hollinger International to themselves and to companies that they controlled." The possible violations include mail, wire, and securities fraud, along with conspiracy and interstate transportation of stolen property.  The district courts usually grant such motions to avoid interfering with a criminal investigation, unless a party can show some prejudice from the delay -- and an indictment doesn't count as prejudicial.  What started as a nasty dispute two years ago between Black and the Hollinger board, which he hand-picked, has now turned into the most dangerous of animals, a criminal investigation. An AP story here discusses the U.S. Attorney's filing. (ph)

                                                                                  

UPDATE (3/23): A report on Bloomberg (here) states that former Hollinger International board member Richard Perle has received a Wells Notice from the SEC that it intends to file a civil suit against him for securities law violations. Perle was a member of Hollinger's three-member board executive committee, along with Lord Black and former company president David Radler, who is also a target of the criminal investigation along with Black.  The committee approved the non-compete agreements and compensation payments that are being investigated by the grand jury and that are the basis of the SEC securities fraud action.  Perle was an Assistant Secretary of Defense during the Reagan administration and a foreign policy advisor to President Bush during the 2000 campaign. (ph)

March 23, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

Perjury Problems for Barry Bonds?

While current and former baseball players were testifying -- even while not answering questions -- before the House Government Reform Committee last week, a woman who claims she had a long-term relationship with Barry Bonds was testifying before a federal grand jury in San Francisco in connection with the BALCO prosecution that is still pending.  According to a San Francisco Chronicle article (here), Kimberly Bell testified that Bonds told her he used steroids, and gave her $80,000 in cash from autographing baseballs to purchase a house, admonishing her to keep all deposits under $10,000 to avoid currency transaction reporting requirements.  Last December, the Chronicle reported that Bonds told the grand jury that he did not know a substance given to him by his trainer included steroids,and said that he never knowingly took them.  Bell's testimony indicates that prosecutors are focusing on Bonds and, like Chris Webber before him, may be considering perjury charges (in addition to tax charges if the money was not reported, much like the charges against Pete Rose and Duke Snider among others). (ph)

March 23, 2005 in Grand Jury, Perjury | Permalink | TrackBack (0)

Never Too Young to Spam

Anthony Greco, who is 18, entered a guilty plea today in Los Angeles to making extortionate threats against an internet instant messaging company, MySpace.com, if it did not give him "exclusive" rights to send commercial e-mails to users of the company's instant messaging service.  According to a press release issued by the U.S. Attorney for the Central District of California, Greco made his demand after sending spam e-mail to accounts at the company:

* * * Greco admitted that he wrote a computer program that was later used to create thousands of fraudulent accounts at instant messaging service MySpace.com in October and November 2004. The program automatically sent more than 1.5 million spam messages containing advertising for mortgage refinancing and pornography to MySpace.com users. MySpace.com is an online community with instant messaging services. MySpace.com spent more than $20,000 to delete nearly 1.5 million unopened "spam" messages from its servers and to take protective measures against additional attacks.

Eighteen years old and facing a term of imprisonment is no way to celebrate graduating from high school.(ph)

March 23, 2005 in Computer Crime | Permalink | TrackBack (0)

Director of Plastic Surgery at Kentucky Added to Fake Botox Indictment

A grand jury in the Southern District of Florida (Ft. Lauderdale) added Dr. Robert Baker, the director of plastic surgery at the University of Kentucky, to an indictment charging three other doctors and four corporations with mail fraud in promoting the sale and use of fake botox (see Feb. 7 post here).  The superseding indictment alleges that Dr. Baker provided a testimonial letter about the fake botox that was sent to health care practitioners.  The press release issued by the U.S. Attorney's Office is here. (ph)

March 23, 2005 in Fraud | Permalink | TrackBack (1)

Tuesday, March 22, 2005

Ninth Circuit Upholds SEC Temporary Freeze Authority for Extraordinary Payments

The Ninth Circuit issued an en banc opinion (here) upholding Section 1103 of the Sarbanes-Oxley Act, which authorizes the SEC to seek a temporary freeze on extraordinary payments by a publicly-traded corporation when it is being investigated by the Commission for possible securities violations. The case, SEC v. Yuen, involves a freeze on a $37 million payment by Gemstar-TV Guide International to its former CEO and CFO who were leaving the company during an SEC investigation into the improper booking of revenue by the company.  The court noted that "[s]imultaneous with the internal and external unraveling of this creative accounting mess, CEO Yuen and CFO Leung were cutting a new deal with Gemstar’s Board to 'resign' from their respective executive positions — but remain as employees — in return for a payment in cash by Gemstar to Yuen of $29.48 million and to Leung of $8.16 million, plus large shares of stock and stock options." The majority opinion describes the statute's operation:

Enacted in the disturbing shadow of a flood of corporate scandals, its purpose is to temporarily protect corporate funds and the investing public and creditors against theft, fraud, and dissipation. As the Commission underscores in its brief, (1) the initial escrow lasts for only 45 days with the possibility of a single 45-day extension, see 15 U.S.C. § 78u-3(c)(3)(A)(I), (iv); (2) any person affected by the escrow order has the right to petition the court for relief, see 15 U.S.C. § 78u-3(c)(3)(B)(I); and (3) if no enforcement action is filed before the temporary escrow expires, the "extraordinary payments" involved shall be returned to the issuer or other affected person with accrued interest, see 15 U.S.C. § 78u-3(c)(3)(B)(ii).

The Ninth Circuit found that the term "extraordinary" was not void for vagueness, describing the rationale for the temporary freeze authority:

One after another, many persons, companies, and pension plans have been left holding an empty bag after corporate insiders committed fraud and other corporate crimes and misdeeds at the ultimate expense of the corporation’s shareholders, creditors, and innocent employees. By the time the authorities have been alerted to the fraud, it’s too late; the assets of the company have already disappeared, rendering the traditional remedies used by the Commission to rectify such wrongs — disgorgement, civil penalties, restitution, etc. — difficult, if not impossible, to pursue. In the meanwhile, the disappearance of such funds impoverishes and damages the issuer itself, once again to the detriment of the shareholders, creditors, and innocent employees, whose pensions in many cases have been permanently thrashed. Ultimately, our nation is the victim, as the public loses confidence in the stock market.

(ph)

March 22, 2005 in Judicial Opinions, Securities | Permalink | TrackBack (0)

Assertion of the Fifth Amendment Leads to Firing of Two AIG Executives

An article in the Wall Street Journal (here) states that two senior American International Group Inc. executives -- Howard Smith, the company's CFO, and Christian Milton, a vice president -- have been fired because they indicated that they would assert their Fifth Amendment rights in response to the investigation of the company by the SEC and N.Y. Attorney General Eliot Spitzer.  The investigation concerns an insurance transaction between AIG and General Re (a unit of Berkshire Hathaway) that is in effect a reinsurance contract that may have been used by AIG to pump up its insurance reserves.  Reinsurance contracts are nothing new to these companies, but this one was odd because it was General Re buying reinsurance rather than its usual business of selling such contracts.  The contract triggered the resignation of long-time AIG CEO Maurice Greenberg last week, and the focus on Greenberg will be heightened.

The firings of the two executives, who had been put on leave last week when Greenberg resigned, highlights a growing trend in corporations that are being investigated by the government and seek to avoid criminal charges by cooperating and conducting internal investigations.  In this case, Smith and Milton have every right to assert the Fifth Amendment to internal investigators because their statements will be turned over to the government, but they have no protection from their employer using that assertion to terminate their employment, unless they have a contract protecting them from such termination.  There could be an argument about whether assertion of the Fifth Amendment is "good cause" if they are not at-will employees, but that issue won't get decided for quite a while.  A more immediate issue for them will be whether the company continues to pay their legal bills, which is a common right given to corporate executives.  The Department of Justice is suspicious of companies that continue to pay the legal bills of executives who are the targets of criminal investigations, and has stated that it may view the corporation as not being cooperative in that situation.  A criminal charge could cripple AIG because its licenses to sell insurance could be at risk, so the company needs to avoid a criminal charge at almost any cost. A refusal to pay attorney's fees for its executives would be an issue of contract and state corporate law, and AIG may refuse to pay for the executives' attorneys to show how cooperative they are now, and deal with any legal consequences from a breach of contract later.

For the executives, their assertion of the Fifth Amendment will ratchet up the pressure from the government to cooperate.  A Fifth Amendment claim usually has a "where there's smoke, there's fire" effect on prosecutors, and the involvement of the U.S. Attorney's Office in the AIG/General Re investigation will increase, if it hasn't already.  This is hardly good news for Greenberg and executives at General Re who were involved in the transaction because they are now the primary targets of this new phase of the investigation.  Warren Buffet will continue to rue the day he decided to buy General Re, which has been a millstone for Berkshire Hathaway. (ph)

March 22, 2005 in Investigations, Privileges | Permalink | TrackBack (0)

"King Richard of HealthSouth"

Weston Smith, the fifth of the Guilty CFOs (a good name for a garage band, for which HealthSouth was infamous), began his testimony in the prosecution of former HealthSouth CEO Richard Scrushy, by noting that executives referred to Scrushy as the "king" because he made every decision.  The defense objection to that description was upheld, and I'm not good enough with my Shakespeare to do much with that for any analogy, but Smith did testify that he wanted to quit the company rather than sign financial statements that would subject him to liability under the newly enacted Sarbanes-Oxley Act's CEO/CFO certification provisions.  Smith stated that Scrushy persuaded him to sign because he planned to end the fraud in the near future.  As the final CFO to testify (of the five who served the company and entered guilty pleas), the cross-examination will be equally tough as with the previous four. 

I'm wondering whether the government's case has started to get bogged down with all the CFOs, and whether the jurors are still paying attention.  It has been going on for about two months, the jury has been subjected to a parade of cooperating witnesses who agreed to plead guilty in exchange for possible leniency, and there is still a ways to go before the prosecution wraps up.  Saying that all five of a company's CFOs participated in a fraud may sound better than it plays with the jury.  Moreover, the defense may take a while, especially if, as I expect, Scrushy testifies to establish his claim that he was lied to by all those CFOs (and others).  The Ebbers prosecution was a veritable model of efficiency compared to this trial by taking only six weeks (including 8 days of jury deliberations), and I suspect that time is not on the government's side here.  An AP story here discusses Smith's testimony. (ph)

March 22, 2005 in HealthSouth | Permalink | TrackBack (0)

Legal Ethics Blog by Ben Cowgill

A new blog that is worth checking out is Legal Ethics Blog by Ben Cowgill (here). Ben pitches his blog to practitioners, and his take on issues will be useful as the number of ethics/professional responsibility issues that arise in white collar crime cases is certainly growing with lawyers involved in advising clients and (unfortunately) as targets of investigations. (ph)

March 22, 2005 in Legal Ethics | Permalink

Seizing U.S. Assets of Foreign Officials

U.S. Immigration and Customs Enforcement has set up a Foreign Corruption Task Force (fact sheet here) in Miami to locate and seize properties in South Florida owned by officials of foreign governments who use funds from corruption in their home countries to purchase assets in the U.S.  An AP story (here) describes the Task Force and its seizure of a Key Biscayne condominium purchased by a former Nicaraguan tax official, and how the $2.7 million in proceeds from the sale will be used to build and equip four schools in Nicaragua. (ph)

March 22, 2005 in Corruption, International | Permalink | TrackBack (0)

Monday, March 21, 2005

Time Warner Settles SEC Action with $300 Million Civil Penalty

Time Warner agreed to settle a civil action with the SEC, which had been hanging over the company's head for over two years, by agreeing to pay a $300 million civil money penalty.  The investigation concerned the accounting for $400 million worth of round-trip transactions between Bertelsmann AG  and AOL related to advertising.  The SEC's Litigation Release (here) states:

Beginning in mid-2000, stock prices of Internet-related businesses declined precipitously as, among other things, sales of online advertising declined and the rate of growth of new online subscriptions started to flatten. Beginning at this time, and extending through 2002, the company employed fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slow-down. The round-trip transactions ranged in complexity and sophistication, but in each instance the company effectively funded its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions, the company typically structured and documented round-trips as if they were two or more separate, bona fide transactions, conducted at arm's length and reflecting each party's independent business purpose. The company delivered mostly untargeted, less desirable, remnant online advertising to the round-trip advertisers, and the round-trip advertisers often had little or no ability to control the quantity, quality, and sometimes even the content of the online advertising they received. Because the round-trip customers effectively were paying for the online advertising with the company's funds, the customers seldom, if ever, complained.

The Commission also brought administrative proceedings against three Time Warner executives, including CFO Wayne Pace, and all entered into settlements and agreed to accept cease-and-desist orders, but will not pay any civil penalty or be barred from serving as an officer of a publicly-traded company (here).

The issue of round trip transactions has been a particular focus of the SEC since the collapse of Enron, and has recently come up in the investigation of accounting problems at Delphi (see earlier post here). (ph)

March 21, 2005 in Civil Enforcement, Securities | Permalink | TrackBack (0)

Leaking Information to Harm Opposing Counsel?

Mike on the Crime & Federalism blog has an interesting post (here) about a leak of information concerning a tax investigation of a prominent civil rights attorney, and Mike's theory about the reason for the leak that is linked to the government's subsequent motion to have him disqualified because of a potential conflict of interest. The newspaper (Los Angeles Daily Journal) has resisted disclosing the source of the information, and whether prosecutorial or investigative misconduct will ever be proven is questionable, given how few Rule 6(e) or DOJ Office of Professional Responsibility investigations ever turn up evidence of the actual person who disclosed confidential information. (ph)

March 21, 2005 in Grand Jury | Permalink | TrackBack (0)

"That's My Boy"

The ugly brawl at the Pistons-Pacers game in 2004 has triggered an interesting situation in which the attorney for the fan accused of throwing a chair into a large group that included Pacers players will be called to testify at his (now former) client's trial. Kenneth Karasick is on the prosecutor's witness list because, according to the police, when he was viewing a videotape of the person who threw the chair, he said, "That's my boy."  Karasick denies having said any such thing, stating, "I'll be a hostile witness . . . I'm not going to testify to something I didn't say."  The Michigan Rules of Professional Conduct, like the rules in virtually every other state, prohibit an attorney from being a witness at a client's trial (MRPC 3.7), so the client will have to obtain new counsel.  An article in the Detroit News (here) discusses the prosecution of the various fans and players, including a number of motions that have been filed in the case. (ph)

March 21, 2005 in Privileges, Prosecutions | Permalink | TrackBack (0)